This document discusses how risk can be used in advertising. It describes an experiment where students were asked if they would prefer $500 for sure or a 15% chance to win $1 million. About half chose the sure $500 despite the potential higher expected value of $150,000 from the risky option. The document notes that customers generally prefer product satisfaction guarantees to reduce risk. It advises advertisers to use such guarantees to appeal to customers' preference for reducing risk when making purchases.

1. How Can Risk Be used in Advertising? View as slide show Adapted from AdPrin.com

2. Risky Business What would you rather receive? ___ a) $500 for sure or ___ b) a 15% chance to receive $1,000,000 (and an 85% chance to receive nothing)? See the next slide for what many students chose 2

3. Frederick (2005) asked students at various U.S. universities. About half of the students chose $500. The expected value of the second offer is $150,000. Customers prefer product-satisfaction guarantees (Persuasive Advertising p 40-1) To reduce customer risk, use a product satisfaction guarantee (Principle 1.3.6) This has long been known to advertisers, although the power has likely been under-estimated. However, as a consumer, you should realize that some sellers are aware of this and they know that that can charge enormous fees to reduce risk, so you may want to decline and “self-insure.”

4. Based on this exercise, write a small application step for yourself, and set a deadline, preferably within one week. If you are working with someone else, share your application plan and the results of your application. For example, provide a product-satisfaction guarantee that you could put in an ad. If you are trying to sell something, consider how you can reduce the risk for the buyer. They are likely be willing to pay a substantial amount for the risk reduction. Adapted from AdPrin.com